In 6 steps on how to invest in the share market, we will talk about:
- What is an investment?
- Why invest in the share market?
- Different types of financial instruments in the stock market.
- What we recommend you invest in?
- How much to invest in the share market?
- To-do’s before you start investing in the stock market
What is an investment?
An investment is an act of putting out some amount of money to gain a profit. You purchase an “asset” (gold, land, house, car, etc.,) so that it may one day produce an income or capital (monetary) gains. In the share market, an investment is a purchase of financial securities such as a bond, stock, mutual fund, ETF, etc. to gain a profit as the value of each security increases.
Why invest in the share market?
There are only two ways to make money in this modern world:
- Work for yourself or someone else (or)
- Let your assets work for you.
If your money stays idle in your pocket, it doesn’t grow. Moreover, most of us forget to consider inflation that affects the prices of goods and services. To have ‘more’ than what you have at the moment, you need to invest. Hence, you can begin by investing in the share market. You can begin by investing as little as 100 bucks too!
Different types of financial instruments in the share market
The ‘How to Invest in Share Market’ will depend on the kind of financial instrument you choose to invest in. Therefore, it is essential we understand some of the types of financial securities.
What is a stock?
Stocks are usually issued by a company as a financial instrument that gives the purchaser part ownership in the company. The investor not only enjoys the part ‘ownership’ but also its profits in the form of Dividends.
Dividends are rewards given to shareholders of the company from its net profits if the company performs well. Dividends are generally cash rewards.
Investors buy stocks that they think will increase in value over time. An individual who owns a share in any firm is called the shareholder of the company. Public companies list their stock through the stock exchange, like the Nifty 50 or BSE Sensex.
The value of the stocks can fluctuate from day-to-day. If the company is performing great, the value of the stock goes up and vice versa. Most importantly, It is essential to perform a quantitative and qualitative analysis of the company before purchasing a stock.
What is a bond?
Bonds are fixed-income securities that represent a loan made by an investor to a borrower. When a company needs to raise money, they issue bonds to the public. The public is then paid a fixed amount of interest as promised by the company at regular intervals. Bonds are created for a minimum of one year. When the bond reaches ‘maturity’, the bondholder is paid back the bond amount plus interest (profit on the investment).
What is a mutual fund?
Mutual fundsare a kind of investment in which the money from investors is used to invest in a collection of shares, bonds, etc. A portfolio (fund/wealth) manager decides how to invest the money. He is paid a fee for his expertise, which comes from the money invested. This is the most beginner-friendly form of investment. A mutual fund is a pool of money put in by a bunch of investors like us. Above all, professional fund managers manage this pool of money. To know more about the different types of mutual funds, click here.
What is a SIP?
A SIP (Systematic Investment Plan) is a recurring plan where you, the investor can make regular, equal payments into a mutual fund or a trading account.
What do we recommend you invest in?
As a beginner, We recommend that you start investing in Mutual Funds. Here are the advantages.
- Low initial investment: You can start investing as low as Rs.100 a month
- Tax Saving: Section 80C provides tax deductions on Mutual Funds. Equity Linked Savings Scheme (ELSS), a type of mutual fund, has become a popular tax saving option
- Professional Fund Management: A professional Fund Manager formulates the strategy for your asset allocation. You don’t have to worry about it
Therefore, for those who are looking to generate income from the share market without putting in effort and time, Mutual funds are a great option.
How much to invest in the share market?
The basic rule of thumb is the 50/30/20 rule!
- 50% of your salary- Needs like rent, groceries, utilities
- 30% of your salary- shopping, dining out, entertainment, etc.
- 20% of your salary- Invest in the stock market
To-dos before you start investing in the share market
1. Set a goal:
Firstly, before we start investing, it’s better if we have a purpose. The target can be a short term goal or a long term goal. For example, it can be as simple as taking a vacation, or it can be more long-term oriented such as saving for a wedding. Our goals can vary from individual to individual. Take some time out and set a meaningful goal.
2. Get a PAN Card
Most of us already have a PAN card. For those who don’t know what a PAN card is, a PAN card stands for Permanent Account Number. We need a PAN card to pay tax. For us to invest in the share market, a PAN card is mandatory. It’s a straightforward process to apply for a PAN card. You can check it out here. Apply for PAN.
3. Open a bank account
Likewise, most of us own a bank account, as well. Similarly, this is a simple process, as well. You can check out this link to open a bank account.
4. Find a financial advisor:
A good financial advisor is key to making money in the share market. Most importantly, financial advisors help us with different aspects of business decisions. Therefore, you should take time and find the best advisor who would suit your needs.
5. Open a DEMAT account:
A DEMAT account holds financial securities in an electronic form. As a result, The mutual funds we buy in the share market will process through our DEMAT account. You can open a DEMAT account here.
6. Research on mutual funds:
Your financial advisor will help you with selecting the best Mutual fund for your needs.
Investing in the stock market can be daunting to most of us. We can help you with this process. Find the right portfolio for your needs, here.